If you’ve heard me speak or read my articles over the years, you know that when people ask me about labor rates, I generally have said: It’s probably easier to focus on your labor hours per estimate than it is focusing primarily on your labor rate. That isn’t to say that having the correct rate isn’t important. It’s just that I often see shops not billing for not-included operations they are performing, and changing that may be easier within their business than trying to negotiate a higher labor rate.
But I will say that as we move forward, I now think shops really need to look at both. You need to look at your average labor hours per job, but you also need to evaluate your labor rates.
Here’s why I see a need for a shift on this. First, I talk to a lot of shops as I travel around the country, and I’ve recently had at least 30 shops reach out to me to tell me a specific carrier actually lowered the labor rate in their market area. In at least one case, the reduction was a dollar amount with double digits. That’s unprecedented.
And think about this: If I’m a shop that uses flat rate to pay technicians, what happens when an insurer starts paying you a lower rate? What’s going to happen if you tell those technicians you now have to reduce their flat rate? You’ll have a mutiny on your hands. But if you accept a lower rate and pay your technicians the same flat rate as you have been, you’ll see a decline in the gross profit on your labor.
The math may be different, but the same is true if you pay your technicians an hourly wage as well. I’m sure you base that hourly wage on technician efficiencies and collecting a certain labor rate to achieve the labor gross profit you need. So that gets negatively affected by a reduction in your labor rate as well.
CCC data showing average labor hours per claim is declining from its peak.
And what’s happening in the U.S. economy right now as you’re facing an unchanged or even reduced labor rate? I think we all know the price of milk or eggs has increased. I think we can all point to other price increases we all face, especially with tariffs. That’s why employees are understandably seeking raises. I wrote earlier this year about the challenge the industry faces in attracting workers given wages in other industries.
When looked at against this backdrop, the leveling off of labor rates seems hard to fathom. Our “Who Pays for What?” survey earlier this year found the median body labor rate (outside of DRPs) on a national basis was up just $2 — barely 3% — over a year earlier.
Again, in the past I would have said focus more on labor hours. But here’s the other trend we’re seeing as well: the average number of body, paint, frame and mechanical labor hours is actually declining. I think given the drop in repairable claims count, insurers see shops aren’t as busy as they were a few years ago, and are using that to their advantage, by saying “We are not paying for this,” and “We are not paying for that.” Shops are increasingly telling me carriers don't want to pay for line items that they used to pay for.
So with both labor rates stagnating — or, in some limited cases, declining — and labor hours falling, focusing on just hours OR rates probably isn’t enough. I think shops moving forward need to focus on both.
That means truly understanding what your labor rates should be. I can’t tell you what that should be, and certainly don’t want to violate antitrust regulations. But to determine an appropriate labor rate, you have to calculate your cost of doing business and understand the cost of living in your area. It’s my personal belief that over the coming years, body labor rates need to start trending upward.
At the same time, you need to continue to monitor your average body labor hours per estimate as well. You need to keep in mind that collision repair work is changing. A technician in the past, for example, may have been 150% efficient, but as you replace — rather than repair — more parts, efficiencies are going to decline. A bumper that in prior years could have been repaired, for example, maybe can’t be today because of the ADAS sensors under that bumper. As that technician’s efficiency declines, so does his or her paycheck.
As I said, I can see part of the cause for the downward trend is insurers pushing back on things. But I also think it’s partly because we have a generation of estimators who likely weren’t properly trained on how to write a complete and proper estimate because of how much work there was for several years. We have a lot of newcomers in the industry who haven’t been trained on what’s included and what’s not. They were just processing estimates.
So keep participating in our quarterly “Who Pays for What?” surveys, and download past reports to use to help train your estimators and repair planners. But also do the math to determine what you labor rate should be — and press to collect it.
Mike Anderson